The involvement of public sector in the cotton trade as an active
player has not only caused a stir among various segments of the cotton economy but in a
way failed to get a spontaneous financial support from the State Bank of Pakistan.

The public sector which remained out of the ambit of cotton trade for a
long time has figured in the market once again with an assignment to create a buffer stock
by procuring one million bales of lint out of the market.

In order to accomplish the task, the government has asked the Trading
Corporation of Pakistan to lift about one million bales of lint cotton from ginning
factories, for which a credit line worth Rs10.8 billion has been allowed by the Ministry
of Commerce. The State Bank has been requested by the Ministry to arrange the required
fund from banking system.

The SBP on the other hand has informed the Ministry of Commerce that
the request made by TCP for a credit line of Rs10.8 billion could not be accommodated
under the credit plan of 1999-2000 unless the amount was shifted to the credit for private
sector. It has been further clarified by SBP that instead of seeking approval of the State
Bank for the credit line as a part of commodity operation, the TCP should better approach
commercial banks on its own. The amount allocated for commodity operation is normally used
by the banks on their own for financing, purchase of commodities like cotton, wheat,
fertilizer or pulses etc by the government.

The Trading Corporation of Pakistan, which has been directed to
purchase one million bales of lint, having a commercial proposition is entitled to seek a
loan from any commercial bank under the terms and conditions to be agreed by the both
sides. It is, however, yet to be seen how the TCP manages the finances, with the proper
sanctioning of the funds. According to reports, the TCP has arranged the first installment
of Rs1 billion from the banking system out of the total amount of Rs10.8 billion under
National Credit Plan for 1999-2000.

The procurement process is to be completed in three phases between
October-December1999. TCP has been directed not to purchase phutti (raw cotton). A support
price of Rs836 per maund for phutti and Rs1,936 for lint has already been announced by the
government.

Public sector

Originally, the decision to keep off the Cotton Export Corporation
(CEC) from cotton trade was taken by the sub-committee of National Assembly's Public
Accounts Committee due to extremely poor performance which had brought huge losses to the
tune of Rs7.2 billion over a period 24 years. Primarily, the active involvement of the
public sector into cotton trade was restricted in 1988-89 when the government had
announced its policy of deregulation of trade in the country. The operations of Cotton
Export Corporation and Rice Export Corporation of Pakistan (RECP) were finally wound up in
1998.

Besides restricting the role of public sector corporations, the
government as a policy matter had decided to give a free hand to the cotton trade which
was widely welcomed by various segments of the cotton trade. The spinning sector, however,
was against the free export of local cotton and has always demanded of the government to
create a buffer stock to ensure availability of cotton in the local market at the fag end
of the season.

In order to ensure supply of cotton to the local industry, the
government has now decided that TCP will procure about one million bales of lint cotton
from ginning factories to create a buffer stock for the lean days.

The government claims that involvement of the public sector in cotton
trade is directed to protect the growers' interest. The support price of Rs1,935 for lint
cotton (Afzal category) per maund has also been announced by the government. Before the
announcement of the official prices for lint and phutti a representative meeting of the
cotton trade attended by growers, ginners and millers to evolve a price consensus.
Pakistan cotton ginners association which is the apex body of ginning industry, however,
differs from government's point of view regarding official prices.

Ginners

The ginning sector which constitutes an important part of the cotton
economy, however, has reacted strongly against the government policy to allow the public
sector into the cotton trade.

To lodge their protest, most ginning factories in the province of
Punjab have started to demonstrate against the government policy by not operating their
factories.

Sheikh Muhammad Saeed, Chairman, Pakistan Cotton Ginners Association
(PCGA), in a letter addressed to Prime Minister Nawaz Sharif, has described the official
rates as unrealistic. Supporting his statement with certain overheads the ginners have to
bear, he said that the rates are not feasible and are tantamount to bring the growers and
the ginners in front of each other fighting for commencement in trading.

He pointed out that without incorporating the actual ginning expenses
on phutti in no way the lint of Afzal category can be commercially viable at the rate of
Rs1,936.

Giving the break up of the price of lint cotton, he said, we have to
take into account the price of cotton seed (Banola) which costs Rs305 in Punjab, Rs260 in
Sindh including Sales Tax. Without Sales Tax the rate of Banola comes to Rs260 in Punjab
and Rs220 in Sindh. The actual ginning expenses have worked out at Rs363.72 per maund of
lint or three maunds of phutti.

He urged the government to review the situation on its right
perspective and ensure survival on real base so that the buying and selling for the
ginners may be possible otherwise the present chaos may create unhealthy environment which
is feared to damage the cotton trade in Pakistan.

Karachi Cotton Association(KCA)

A. Shakoor Dada, Chairman of KCA while commenting on the situation, has
said that KCA firmly believes in free trading in cotton i.e. free export and import of
cotton without any duty and quantitative restrictions as this policy has worked well in
previous years.

He strongly opposed the government intervention into cotton trade which
he feels influence the market behaviour and the price level as it causes unnecessary
distortions in the market and affects other sections of the cotton trade.

It is not the job of the government or any Government agency to buy and
sell cotton as it entirely falls under the purview of activities of the private sector as
it may otherwise cause losses of billions of rupees to the national exchequer which would
ultimately be borne by the poor tax payer of the country, he observed.

He also opposed the involvement of Trading Corporation of Pakistan into
procurement of one million bales and said that marketing of cotton is a highly complex and
intricate affair and its operations by any public sector organization would be marked by a
high degree of inefficiency, incompetence, mismanagement and corruption as in the case of
CEC which sustained huge losses, both visible and invisible, running into billions of
rupees and ultimately it had to be wound up. Moreover, the government agencies lack
necessary expertise, technical skills know-how and facilities to undertake the job. No one
would deny the seriousness of the problem. However, the problem has to be resolved with
mutual consensus and not to protect interest of one section alone without taking into
consideration its repercussions on other segments of the cotton trade which would
ultimately hurt the cotton economy of the country as a whole.

It must be realized that local mills are the major buyers of Pakistani
cotton, buying 8.5 million to 9 million bales while the exporters buy the surplus cotton
available to the extent of 1-1.5 million bales. The local prices of cotton being
competitive, the mills may enter the market and accelerate their purchases which would
help stabilize the local prices and protect the interests of the growers as well. This
will also help to revive the economy and increase exports. With entry of exporters in the
market, the market prices would also improve, assuring a fair return to the growers.

The KCA Chairman also urged the government to suspend the requirement
of grading and classification of cotton by Pakistan Cotton Standard Institute at the
export stage which will help facilitate exports while permission to resume hedge trading
in cotton will also ensure efficient market of the cotton crop.

Cotton situation 1999-2000

The year 1999-2000 promises an excellent cotton crop, exceeding the
target of 9.7 million bales, thereby meeting requirements of domestic mills to the extent
of 8.5-9 million bales and providing surplus for export of at least one million bales. The
international prices of cotton have, however, shown a marked decline in the current year.
The New York Cotton futures rate has declined to 73 cents per pound (October 1999
contract) as on September 28, 1999 from 73.45 cents per pound, recorded a year earlier.

The decline in international prices of cotton is attributed inter-alia
to a large US crop which is estimated to go up to 18.3 million bales in 1999-2000 from
13.92 million bales in 1998-99. Another factor causing this decline is the emergence of
China as an exporting country in the world market as China has started exporting cotton in
order to liquidate its burdensome stocks of cotton which have accumulated over the years.

Pakistan

The ginners have reacted strongly against the public sector involvement
into cotton trade and have decided not to purchase phutti from the growers. They feel that
the government's step of fixing phutti and lint prices and bringing the public sector back
into cotton business was politically motivated as some major cotton producers are in the
opposite camps.

Industry feels now is the time for all concerned, whether government or
private sector to achieve the best out of the expected bumper cotton crop this year. Our
cotton-based economy has already gone through many setbacks due to constant failures of
the crop for the last many years. A better management of the cotton economy can bring the
much sought after relief to the national economy. Creation of any dispute would be
uncalled for at this stage which may deprive the national economy of better prospects.